Importance of social issues in financial inclusion

I have added another paper to my website on the need for financial inclusion and it focuses on India. The paper puts forth a couple of ideas:

  • Use behavioral economics/finance,
  • Address social issues
  • Real-sector inclusion is as important

I have written a lot about behavioral finance and even pointed a paper which looks at using BF to enhance financial inclusion.

As far as the other two points are concerned, I found some material which confirms my belief.

This speech from Prof Yunus shows how Grameen Bank addressed various social issues. He shows how he convinced more women to take micro-credit in what was otherwise a male dominated bastion. Without addressing these issues, this revolution would not have succeeded. As we see very similar conditions in India, we need to understand these issues in detail.

I came across this article from James Surowiecki where he says just providing finance is not enough. If we provide microfinance we expect them to open some small business from the finance. As not all people are entrepreneurs and most actually work for someone else, the problem doesn’t end.

The author goes a step further and advocates the need to promote small and medium enterprises which will employ people.

In any successful economy most people aren’t entrepreneurs—they make a living by working for someone else. Just fourteen per cent of Americans, for instance, are running (or trying to run) their own business. That percentage is much higher in developing countries—in Peru, it’s almost forty per cent. That’s not because Peruvians are more entrepreneurial. It’s because they don’t have other options.

They need more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation. In high-income countries, these companies create more than sixty per cent of all jobs, but in the developing world they’re relatively rare.

Good Stuff.

One Response to “Importance of social issues in financial inclusion”

  1. Syed Zahid Ahmad Says:

    Muslims clogging Inclusive Growth of India

    Muslims and Indian Civil Society:
    The Economic development of the nation needs strategic utilization of natural, physical, human, financial and social resources. Unless we establish socio-economic justice through resource allocation among religious communities, it is meaningless to talk about civil society development and inclusive growth. Abandoned Indian Muslims (as 15% Indian population) definitely need more focused plans and strategies for inclusive growth of India.

    Our Strength – Unity in Diversity:
    The Sachar Committee Report revealed the facts that Muslims are not far better than Scheduled Castes and Scheduled Tribes of India and thus needs special attention in our national plans and policies framed for inclusive growth. We need to believe that the strength of India is ‘Unity in Diversity’. The religious communities may have diversity in believes and approaches, but are united for the nation. Indian Muslims are instinct part of the nation with diversified approach in believes and approach to practice.

    Interest Free Banking for Inclusive Growth of India:
    The Sachar Committee did not consider the constraint of ‘Interest’; the most important reason for financial exclusion of Indian Muslims, rather advocated financial inclusion of Indian Muslims through participation in Scheduled banks. Since majority of Indian Muslims are poor and orthodox, their financial exclusion is mainly due to prohibition of interest in Islam. We must not forget that Indian Muslims shares 18.35% Indian population living below poverty line. So unless Indian Muslims is allowed transacting interest free banking, their financial inclusion is not possible. Without financial inclusion of Indian Muslims, their economic development is not possible. And without economic development of Indian Muslims, it is not possible for India to achieve the much desired real inclusive growth of the nation.

    Sachar Committee Report – Half work done!
    The Sachar Committee Report reflects that Muslims are under financial loss over Rs. 23,766 crores per annum in terms of credit through Scheduled Commercial Banks; as their share in outstanding loans under PSA is just 4.7% compared to 12% share in PSA accounts. A community with more than 31% population living below poverty line and 39.4% as self employed workers, such credit loss pushes it towards more backwardness; ultimately making inclusive growth more difficult. The Sachar Committee not only denied the requirement of Interest free banking for Muslims; but also failed to suggest any suitable measure to make our financial system more interactive and attractive for Muslims.

    Recommendations of Sachar Committee – Imperfect measures
    After Sachar Committee Report, the government took some initiatives to follow the suggestions made by the committee, but none of the initiatives is ensuring financial inclusion of Indian Muslims. The Sachar Committee has reported that participation of Muslims in Micro Finance is very low and share of Muslims in credit through SIDBI and NABARD are also very low. Instead of analyzing the causes of financial exclusion of Muslims, the committee just advocated to increase number of Scheduled Banks in Muslim areas, promotion of Micro Finance and deployment of more funds to NMDFC, SIDBI and NABARD. This approach is irrational because the measures suggested by the Committee are against the orthodox approach and financial requirements of Indian Muslims.

    Approach of RBI toward Indian Muslims:
    RBI is not paying due attention on financial exclusion of Indian Muslims. It should have studied the impact of ‘Interest’ on Indian Muslim’s financial inclusion and suggested some measures to comply with religious and financial need of Indian Muslims. But RBI (might be with intention to avoid any additional procedural changes) has already declined the feasibility of interest free banking in India. RBI should have considered why Muslims are just 0.78% in its working force. Similarly it was not discussed about reasons that why Muslim’s share in credit through SIDBI is just 0.48% and through NABARD is under 4%.

    Dr. C. Rangarajan Committee Report ignored Muslims:
    Under such extreme financial exclusions, it was supposed that the high level committee for financial inclusion would focus on Muslims. It was not a surprise to see that there was no Muslim member in that committee, but unfortunately the committee did not pen a single word about financial exclusion of Indian Muslims. Generally it is not expected that such committees would make community wise study; but since the report worth mentioned specific plans for 100% financial inclusions of SCs and STs, it was duly expected to have some comments on Indian Muslims which is not far better than SCs and STs of India.

    While the Terms of Reference assigned to the Committee on Financial Inclusion contained the task ‘to identify the barriers confronted by vulnerable groups in accessing credit and financial services, including supply, demand and institutional constraints’ The report submitted by Dr. C. Rangarajan Committee did not carry any personal intervention report with vulnerable group. Moreover it did not study the financial exclusion in urban areas. Thus the report did not serve the designated purpose. So it is not justify for the government implementing the suggestions of the report with no study of minority community and with any case of committee’s interference with vulnerable group. If this would be the approach of our high level committees, how financial inclusion mission could be a success?

    Dr. Raghuram Rajan Committee Report – Missing Inclusive Growth potentials:
    The Planning Commission of India set another high level committee to prepare a report on financial sector reforms. This committee is also 0% representation of Muslims. The committee prepared a draft report after interference with more than 82 persons. Unfortunately there was no Muslim among those 82 persons. Neither the committee considered the issue of financial exclusion of Indian Muslims, nor suggested any proposal to ensure financial inclusion of Muslims. How could we set financial sector reform, unless we consider factors responsible for financial exclusion of minorities? With such abandoned financial exclusion of Indian Muslims by committees after committees, we may not be able to develop a civil society nor succeed to achieve the desired real inclusive growth.

    Government Schemes for Minorities:
    In Muslim concentrated areas, the physical infrastructure is always found lacking behind the actual requirements; and the community based institutions constrained by regulations and closed after no support from government schemes. Moreover the schemes announced by government to empower Minorities are also not inclined with Muslim NGOs which could have utilized and help to develop the social resources of Muslims. Such practices of dethroning Muslim social and institutional resources will certainly snag development of civil society and inclusive growth process.

    Policy initiatives are required for real inclusive growth:
    In the interest of the nation it is wise to take due initiatives instigate Indian Muslims into mainstream section to help India realize the desired inclusive growth.

    1. There should be a parliamentary committee to study abandoned financial exclusion of Indian Muslims and recommend measures to ensure financial inclusions of Muslims.
    2. At least one Muslim should be incorporated as member of any committee constituted for study and analysis of national level issue, because it is not justify ignoring minority community while doing strategic study for the nation as a whole.
    3. If any committee has no Muslim member, the committee must have physical interaction with Muslim NGOs or institutions to ensure inclusion of the Muslims in that study, recommendations and schemes framed after that.
    4. Minority related schemes should ensure participation of Muslim NGOs so that Muslim social resources could grow in civil society manner otherwise the process of isolation may threat wastage of Muslim social resources or it may go against national interest.
    5. RBI must consider ways and means to include Muslims as working staff and find means to attract Muslims involvement in monetary and financial service businesses. It may need to incorporate products suitable to shariah compliant.
    6. There should be at least 12% working staff in special financial institutions like NMDFC, SIDBI and NABARD. Moreover such institutions should introduce interest free credit schemes for Muslims because interest is most important hurdle in financial inclusion of Indian Muslims.
    7. Interest Free credit schemes is not only required by Indian Muslims but also by our vulnerable section associated to agriculture, rural, small and micro industries where due to financial sickness entrepreneurs are unable to take financial risk, thus need risk free credit scheme. It is possible that credit on profit loss sharing basis may be provided to these groups through inducing shariah bound investors to interact with these groups.
    8. To allow inflow of capital on profit loss sharing basis for our vulnerable enterprises associated with unorganized sector, it is necessary that such investments should be exempted from all taxes and free from undue formalities.
    9. If we succeed to mobilize capital on profit loss sharing basis (for unorganized sector) from Islamic countries, it may along with capital investment, generate resources for allied industries and also boost export potentials.
    10. The introduction of Islamic Banking for unorganized sector may help our economy in dual manner. At one end it will boost capital investment in unorganized sector without cutting resources of organized sector; on the other end it will generate new sources of employment and income opportunities to shift load of labour from organized sector to unorganized sector.

    Our policy makers and administrative forces need to study the prospects and feasibility of interest free banking and finance for unorganized sector to avoid possible need to loan waiving schemes in future. It depends on our own wisdom whether we take challenges as opportunities or threats. The issue of Interest free or Islamic Banking must be addressed before we frame our financial sector reform and it must be tackled with thorough and sincere study by our financial experts.

    Hope the leader will use their wisdom to study and analyze the issue of Indian Muslim financial resources and adopt suitable policies. This sincere attention and due efforts in this regard will surely ameliorate India develop a true civil society and achieve the much desired real inclusive growth.

    Syed Zahid Ahmad
    Mobile – (091) 9869814113
    E Mail –

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: